End of the road for gold?

No, surely not. However it is time to be cautious for sure. What are the risks in gold? Or is it that there are no risks at all, as some readers would like to believe?
Well let us look at some of the risks:

1.    It is not an essential commodity: You cannot eat gold. If prices go beyond a point, people will just not consume it! It is not air or water.

2.    Remember in the year 2008 gold lost MORE THAN 30% of value – clearly the hedge theory goes. A hedge asset SHOULD move in the other direction, not in sympathy.

3.    In the 1980s gold lost about 65% of its value in about 2 years time! Remember both these events happened against a not very strong currency – the US $!!

4.    When fear subsides, and things return to normal, the law of demand and supply will apply to all assets – including gold.

5.    The Chicago Mercantile Exchange has a very high margin now for gold – and CME is a good reader of volatility. Expect volatility, margin calls, and sales by the lenders – all these do not sound good.

6.    No income generating capability: If you go wrong in a portfolio of good shares (i.e. prices have fallen!) at least you are sure of getting a 2% to 4%p.a. return in dividends. This is not great, but will FORCE lenders / investors to discount the cashflow and arrive at a new price. If the company does well, dividends will increase, forcing the value to go up. Sadly in case of gold, I have to hope that there is a GREATER FOOL THEORY and I will be able to find him, so that I can sell. This is not easy.

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  1. Another problem with gold is that you can earn only be means of capital appreciation. Gold by itself does not earn anything (like dividends etc), unless someone out there is able to create a unique and exotic (not toxic) product.

  2. @dev.you are better off buying copper or lead if you want to buy it as a commodity -considering you are using the tools of cash flow and other valuation.that does not apply to gold which is catastrophe insurance(physical gold) and protection against moneyprinters of the world

  3. “If prices go beyond a point, people will just not consume it! It is not air or water.”

    Same thing applies to stocks as well. We are yet to see someone who survives by consuming Tata or L&T shares.

    To invest in stock market one has to do a lot of research. How many are really capable of that? It definitely is not for everyone. Or one has to depend on some adviser. Not so with gold. Just buy it when you have money. And keep accumulating. It will definitely have some value some where anytime.

    Also Govt.s show interest in stock market, because they can easily sell of public property (in the name of public issue) to generate cash for their petty fancy projects. (Like that of Pranab da’s disinvestment plan). Unfortunately they cannot do that with gold, in physical form. Hence do everything possible to discredit it.

    But, I do not say that gold is risk free.

  4. ” You cannot eat gold. If prices go beyond a point, people will just not consume it! It is not air or water.”
    You cannot eat paper currency either Subra.

    I agree, Gold Is NOT an investment. It’s simply money- Medium of exchange and store house of value, has been so for thousands of years.

    As for investment- Where you (mostly) retain your money and make a decent return above inflation.. Yes, shares and mutual funds are better investments than gold.

    It’s just a matter of definition really.

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